How to limit your chance of being audited by the IRS
An audit is a review by the IRS of your tax return in order to determine its accuracy. It is a fact of life that a certain percentage of tax payers gets audited each year.
In determining whom to audit the IRS looks for certain red flags — but its is also possible to be audited even when no such indicators are present.
If you’re wondering what impels the IRS to conduct an audit, you’re not alone.
“The IRS has a formula, and it’s a secret formula,” said Eric Toder, senior fellow at the Tax Policy Center. “They have developed statistical associations between noncompliance and the kinds of things you put on your tax returns.”
“There’s no such thing as a guarantee that you will not be audited,” said Wilma Hayes, a tax professional and professional adviser with H&R Block. “Even for people who don’t have anything blatantly suspicious on the return. There is what the IRS calls ‘random audits.’ “But there are some mistakes you can make that can trigger an audit.”
Here are a few tips tax experts recommend you avoid when filing your return.
Watch out for the child tax credit
One of the more common mistakes that set off the IRS sensors last year occurred when two parents filed separately and both claimed the same child, said Rich Preece, a spokesperson from Turbo Tax.
Be careful when claiming your home office
Although claiming your home office expense is a legitimate deduction, Hayes warns that you have to be careful to only use that space for work. Hayes said. “It’s literally an office set up in one room–you should not have a television in there.”
Rental properties vs. vacation homes
A common mistake that many people make is claiming what the IRS considers a vacation home as a rental property.
“A lot of people don’t realize if you stayed in that rental property for more than 14 nights or a combined total of 10% or more of the total time it was rented, the IRS considers it a vacation home and there’s an entirely different set of deductions,” Preece said.
Mistakes with moving expense deductions
According to Preece, in order to qualify for a deduction, you have to be moving more than 50 miles away and it has to be at the request of your employer.
Be extra cautious if you’re self-employed
It’s no secret that the self-employed are typically audited more than salaried employees. Last year, the IRS audited 2.1% of small businesses earning between $25,000-$100,000, and those earning below $25,000 and above $100,000 were audited at a rate of 3.8% and 3.9%, respectively. Only 1% of individual returns were audited last year, so it’s clear that the IRS pays special attention to people who own their own business.
“The IRS looks closely at people who are in business for themselves. Those who need to keep separate bank accounts and credit cards for business and personal expenses,” Hayes, of H&R Block, said. “These people need to keep a diary if they’re taking clients out and need to write in that diary when and why they took clients out. Sometimes a diary can substitute for receipts, but there has to be a pattern that the auditor will see at the audit as the client is flipping through the diary to justify the expenses.”
Claiming a casualty loss or theft
If you had insurance on an item that was lost or stolen, it is likely that during the time you owned the item its fair market value decreased. If you collected insurance for the amount you originally insured the item for, the IRS may consider you to have made a profit on something that was actually a loss.
Watch out for when you file
Although there are always theories about which time of year is the best time to file your taxes, Hayes said she has seen less audits among people filing in October after an automatic extension.
Ultimately, there’s no way to guarantee that you won’t be audited. This year, the IRS plans to randomly select 13,000 people who file perfectly normal returns for audit. If you’re one of the unlucky chosen ones, remember to keep documentation to back up all of your deductions and relax. The IRS isn’t really out to get you, it’s just trying to enforce its own rules.
- Source: Summarized from FoxBusiness, Mar. 14, 2008
What is an audit?
An IRS audit is generally an impartial review of your tax return to determine its accuracy. It is not an accusation of wrongdoing. But it is important to know that you, the taxpayer, generally have to substantiate the entries on your return. The IRS does not necessarily have to disprove anything. For example, if you gave $100 worth of old clothing to a charity but did not receive a receipt or have other proof that such a gift was made, you could be in trouble if you’re audited. If the IRS questions the deduction and you cannot provide proper evidence that a gift, in such amount, was made, the deduction may be disallowed.
- Source: MetLife
What are my chances of getting through an audit without owing additional taxes?
Fewer than 25% of audit victims make a clean getaway. The IRS audits half as many taxpayers today as five years ago, but the take per audit has increased. The IRS, thanks to its sophisticated computer selection process, audits only those returns in which adjustments are almost a certainty. Realize the odds are against you and focus on limiting the damage from an audit.
- Source: Nolo.com
Book: Beat an IRS Audit
No one wants to be audited by the IRS. Even taxpayers who are certain that their returns were accurate and all of their deductions and other tax write-offs are justifiable are somewhat intimidated by the receipt of notice from the IRS that they have been selected for an audit.
Having to offer proof of income, deductions, exemptions and credits, especially if the proof may be missing or inadequate, can be unnerving.Even more unsettling is that the IRS auditor can still disagree with your proof even when you have all your receipts.
Beat an IRS Audit provides readers with everything they need to know to handle an audit. From discussing information on avoiding the audit in the first place, to explaining what steps to take to prepare for one if selected, the entire process is simplified and made understandable.
More IRS Tax Information Books
• Tax This!: 2008 Edition: An Insider’s Guide to Standing Up to the IRS
• Help!!! I Owe Back Taxes!
• How to Settle With the IRS for Pennies on the Dollar: The Unoffical Guide for Taxpayers Who Owe the IRS
